Final S66 # 13

Herd Behavior

(following the herd) - "If others are rushing to get in, so should you!";

c- The bank is paying interest at the rate of .3% per month. This is the same as an annual percentage rate of .3% x 12 months = 3.60%. The annual percentage yield would be somewhat higher than 3.60% due to the fact the compound interest earned on the monthly interest payments received would increase the annual yield slightly.

A customer is told by a bank that his investment will pay interest at the rate of .3% per month. This would be the same as telling the customer that his or her: Aannual real rate of return is 3.6% Bannual percentage yield is 3.6% Cannual percentage rate is 3.6% Dyield to maturity is 3.6%

B- An "offer" or "offer to sell" is defined as any attempt to offer to dispose of a security, or a solicitation of an offer to buy a security or an interest in a security, for value. The agent has contacted the officer of the company, to see if she is interested in selling the shares that this customer wishes to buy. When the agent contacts the customer with the news that he has found an officer willing to sell the shares, the agent is making an offer to sell the securities to the client.

A customer of a broker-dealer is a sophisticated investor and is interested in purchasing the shares of XYZZ Corporation, a company that has recently gone public and is thinly traded in the Pink OTC Market. The customer contacts his agent to buy the shares, but the agent does not see any shares offered in the market so he contacts one of the officers of the company to see if that officer has shares that she wishes to sell. The officer agrees to sell some of her shares under Rule 144, so the broker recontacts the customer to tell him that he has found the shares that the customer wishes to buy. In this scenario, the agent has: Aviolated the Uniform Securities Act Bmade an offer to sell to the customer Cmade an offer to buy to the customer Deffected an exempt transaction with the officer

C- If a representative were to sell these promissory notes offered by an outside individual, then the rep would be "selling away" from his firm - that is selling securities to a customer that are not being offered by that firm. This is a violation of NASAA rules (since the customer thinks he is buying the securities from the broker-dealer and not from some other person!). The only way that a representative can "sell away" is if the representative asks the firm's permission in writing; receives written permission of the firm; and the firm records the transaction on its books and records and supervises it as if it were its own transaction (like that would ever happen!).

A representative at a member firm is approached by a person outside that firm to sell promissory notes through that member's branch office. Which statement is TRUE? AThe representative is prohibited from selling the promissory notes BThe representative may only sell the promissory notes after receiving verbal permission of the member firm CThe representative may only sell the promissory notes after receiving written permission of the member firm DThe representative may sell the promissory notes without restriction

D- Consider this to be a learning question. Any registration statement for a securities offering includes: Current balance sheet and income statement; Business description; Use of proceeds of offering; Offering Terms; Legal Opinion; Accountant's Opinion. There are no projections in the registration statement.

All of the following information would be found in a registration statement for a security that is going to be registered by qualification in a State EXCEPT: Aa current balance sheet of issuer Bthe price of the security being offered Cthe use of proceeds of the offering Dprojections of future earnings of issuer

C- Credit card payables are a liability of an individual; individual retirement account balances are an asset; and short term investments are an asset. All would appear on an individual's balance sheet. On the other hand, term life insurance coverage is an "asset" only if one dies; so there is no asset value on one's personal balance sheet. Note, however, that "whole life insurance" has an investment value component, and that value would show as an asset on an individual's personal balance sheet.

All of the following would be found on a client's personal balance sheet EXCEPT: Acredit card payables Bindividual retirement accounts Cterm life insurance coverage Dshort term investments

B- If a broker-dealer is registered with the SEC, and its representatives are registered with the SEC, and if the broker-dealer does not charge separately for advice, then it is excluded from the definition of an "investment adviser" and need not register as such with the SEC. However, if the broker-dealer were to charge separately for a financial plan, then it would have to register with the SEC as an investment adviser; and its sales persons would have to register as "investment adviser representatives".

An individual who is a registered representative with a broker-dealerprepares financial plans for customers under the supervision of the broker-dealer and does not charge for the plans. The individual takes commissions on transactions that result from the implementation of the recommendations included in the plans. Under SEC Release IA-1092: Aboth the individual and the broker-dealer must register with the SEC as an investment adviser representative and an investment adviser, respectively Bneither the individual nor the broker-dealer need register with the SEC as an investment adviser representative and an investment adviser, respectively Cthe individual must register with the SEC as an investment adviser representative; the broker-dealer is not required to register with the SEC as an investment adviser Dthe individual need not register with the SEC as an investment adviser representative; the broker-dealer is required to register with the SEC as an investment adviser

B- All securities transactions effected by agents of broker-dealers must be known to the firm and supervised by that firm. If the agent sells the private placement units to his customers, he has committed a violation known as "selling away" from his firm. He has sold his customers securities in transactions that the firm does not know about; yet the customers will think that they bought the securities from the broker-dealer (rather, they are buying the securities from the agent's sister!). The only way for an agent to "sell away" from the firm is to get the firm's permission in writing to sell the private placement units. Also note that Choice A has some merit, since a 20% commission seems high, but Choice B is the better answer.

An individual works as both a registered agent for a broker-dealer and a representative of an investment adviser, both of which are owned by the same parent company. The individual's sister has started up a successful e-tailing company that she wishes to expand. She asks her brother to sell private placement units of her company to his customers in return for a 20% commission that she will pay. Which statement is TRUE? AThis action is prohibited because the commission amount to be paid is excessive BThe action cannot be taken unless the brother obtains written permission of the broker-dealer CThe partnership units cannot be sold to the agent's customers unless they are registered in the State DThe partnership units cannot be sold to the agent's customers unless separate records are kept covering these transactions

B- The SEC has initiated fraud charges against investment advisers based on their undisclosed trading practices. The typical procedure for handling trades executed in a single block is to allocate the securities equally among clients at a uniform price on a pro-rata basis. This is the typical disclosure made to clients. Depending on market conditions, the adviser may not be able to purchase the security for all clients at the same price. Instead, it may have to purchase the security over several days at different prices . In such a case, each client should receive a pro rata allocation at the weighted average price. However, if the adviser favors one client over another in the allocation of the block, the adviser has violated its fiduciary duty (if it fails to disclose this conflict of interest to its clients).

An investment adviser has placed a block trade for 100,000 shares of ABCD stock. The trade is filled in 2 separate lots of 50,000 shares each, with one lot filled at $50.01 per share and the other lot filled at $50.03 per share. The adviser has developed a methodology of allocating shares purchased at the lowest price to clients with a history of referring other clients and to clients with more assets under management and has been doing this unknown to staff and clients for many years. The investment adviser is guilty of: Afailure to supervise Bbreach of fiduciary duty Cfailure to adhere to prudent investor standards Dinsider trading

B- NASAA requires that the investment adviser furnish the Brochure (Form ADV Part 2A) and the Brochure Supplement (Form ADV Part 2B) to an advisory client or a prospective advisory client. The Brochure and Supplement must be furnished: not less than 48 hours prior to entering into any advisory contract with such client or prospective client; or at the time of entering into the contract, the advisory client has the right to terminate the contract without penalty within 5 business days.

An investment adviser is looking to offer advisory services to new clients. Which statement is TRUE regarding delivery of Form ADV Parts 2A and 2B? AThey must be delivered only if the individual becomes a client of the investment adviser BThey must be delivered regardless of whether the individual becomes a client of the investment adviser CThey must be delivered only upon written request of the individual that is considering becoming a client DThey must be delivered only upon receiving a check for the initial investment amount from the client

B- If this stock is such a good investment, why is the investment adviser representative (IAR) selling? There is a conflict of interest here that must be disclosed to the customer to whom the purchase of the stock is being recommended. In addition, when an investment adviser or an IAR is selling a security to a client that the adviser or IAR personally owns, the customer must give written permission to that transaction (since this is such a major conflict of interest).

An investment adviser representative (IAR) personally owns 100,000 shares of DEF stock. He believes that the stock is a good long term investment, but that the price will remain flat for the next 18 months. He recommends the purchase of the stock to one of his best customers, who has an investment objective of capital gains, and when the customer agrees, arranges to have his 100,000 shares sold to that customer. This action is: Aunethical because the recommendation does not correspond to the customer's investment objective Bunethical because the IAR has a conflict of interest that must be disclosed to the customer at the time the recommendation is made and the customer must given written permission to the transaction Cunethical because the IAR cannot sell his own personal position to a customer Dpermitted without restriction

D- Investment advisers and their representatives are held to a fiduciary standard. If they are making investments personally, they are already investing alongside their clients. Because of this, IAs and IARs cannot share in gain and loss of a customer account. If they are making personal investments, they must be the same as those made for clients, and all will experience the same gain or loss anyway! Note that this completely differs than the rule for broker-dealers and their agents, who are not held to a fiduciary standard.

An investment adviser representative wants to share in the gain and loss of a customer account. Under NASAA rules, this is Apermitted if the IAR opens a joint account with the customer; contributes capital; and shares in proportion to the capital contributed Bpermitted only if the IAR charges a lower advisory fee to the client Cpermitted only if the Investment Adviser does not charge an advisory fee Dprohibited

II and III The main intent of the Investment Advisers Act of 1940 was to register advisers to investment companies and place limits on their compensation. SEC registration is not required for advisers to insurance companies because there is no worry that an insurance company (which is a sophisticated purchaser) will be overcharged. Because the Investment Advisers Act of 1940 is federal legislation, which only applies to transactions that "cross State lines," if a transaction occurs wholly within 1 State, then Federal law does not apply and only that State's law applies. This is an "intrastate" exemption.

An investment adviser will NOT be required to be registered with the SEC if the: I adviser's only clients are investment companies II adviser's only clients are insurance companies III adviser is located in only 1 State and all of the adviser's clients reside in that State

A- Domicile, or geographic location of the investor, is not relevant in diversifying a corporate bond portfolio. For example, it is irrelevant if the client is located in Michigan or New Jersey or any other state; that will have no impact on the risks facing the issue. This could be a factor for municipal bond investors due to the possibility of avoiding state income tax. A corporate bond portfolio can be diversified by issuer, quality (rating), domicile of the issuer, and maturity.

An investor diversifying a corporate bond portfolio does NOT consider A domicile of the investor B quality C issuer D maturity

B- Adding additional securities to a portfolio usually increases the diversification, lowering the overall risk. However, that is more apparent when there is low or negative correlation. A +.95 correlation means that the "new" stock will perform close to exactly the same as the existing one so its addition should have little to no impact on performance. In a bearish market, values go down, not up or remain the same. If this additional stock had a negative correlation, that could have resulted in the portfolio going up or remaining the same, but not with a +.95 correlation. It is almost never that a question on the exam does not have enough information to arrive at the correct answer - steer away from that choice.

An investor's portfolio consists of a single stock. If a stock with a correlation of +.95 was added to the portfolio and the stock market turned bearish, what would be the likely effect of having added this additional security? A Not enough information to tell. B Almost no noticeable impact. C The portfolio's value would remain the same. D The portfolio's value would increase.

A-

If the mails or other means of interstate commerce are used to offer securities, then the Securities Act of 1933 requires that: A-exempt securities be registered with the SEC Bexempt securities be registered with the SEC Cboth non-exempt and exempt securities be registered with the SEC Dthe persons offering the securities be registered with the SEC

D- An efficient market is a market that quickly reflects all new information. Accordingly, securities prices will not depart from their justified economic value for any extended period of time. Investors who are strong subscribers to the efficient market hypothesis (EMH) will be passive investors because they believe you just can't beat the market. On the other hand, investors who do not believe in the EMH will become active investors and will seek to identify undervalued securities.

In a financial market that is efficient, A.investors who do not believe in the efficient market hypothesis (EMH) will stop seeking undervalued securities. B.new information will be slowly reflected in securities prices. C.investors will take an active investment strategy if they are strong believers in the efficient market hypothesis (EMH). D.the prices of securities will not differ from their justified economic values for any length of time.

Aside from salaries and wage, dividends and capital gains are included in AGI (Adjusted Gross Income), against which adjustments (deductions) are taken, to arrive at taxable income.

In a given year, a client receives an extra dividend from an investment in participating preferred stock. To calculate AGI (Adjusted Gross Income) for the year on the investor's tax return: Athe dividend will be included in gross income minus all adjustments Bthe dividend is excluded to arrive at AGI Conly dividends in excess of the exclusion amount are included in AGI Dthe dividend will be included in gross income against which the tax rate is applied

I,III,IV Investment advisers cannot assign (transfer) an advisory contract without the customer's permission. Charging commissions on trades effected for the client is prohibited since the adviser is compensated based on a percentage of assets under management. However, if the adviser has a separate broker-dealer, the broker-dealer entity can handle the trades and earn the commissions, as long as this is disclosed at the time the contract is signed. Investment advisers are obligated to notify clients if the management of the investment adviser changes (when the investment adviser is structured as a partnership). There is no prohibition on an investment adviser charging a retainer fee.

Investment advisers are prohibited from: I Assigning a customer's contract without permission II Charging a retainer fee III Charging commissions on trades effected for the client IV Changing partnership management without notifying clients

I and IV- Life insurance proceeds are generally free from income taxes and will be free from estate taxes, if the insured possesses no incidence of ownership. In other words, a beneficiary other than the deceased's estate has been named, and the owner is someone other than the insured.

Jean owns a $1 million life insurance policy on her mother, Clara. Jean is named as sole beneficiary, and so far she has paid $150,000 in premiums. If Clara dies, which of the following will occur? I. The proceeds will be exempt from income tax. II. $850,000 of the proceeds will be subject to income tax. III. The proceeds will be included in Clara's estate for estate tax purposes. IV. The proceeds will not be included in Clara's estate.

A- The highest level of diversification will occur when the correlation coefficient is closest to −1. Of the 4 pairs of assets, assets 7 and 8 offer the highest level of diversification because the correlation coefficient of −0.88 is closest to −1. The returns on assets 7 and 8 should generally move in opposite directions because they are negatively correlated. Assets 1 & 2 will provide virtually no diversification because they have almost perfect correlation.

Of the 4 pairs of assets below, which pair provides the highest level of diversification? A Assets 7 & 8: with a correlation coefficient of −0.88 B Assets 3 & 4: with a correlation coefficient of +0.47 C Assets 5 & 6: with a correlation coefficient of 0 D Assets 1 & 2: with a correlation coefficient of +0.94

I and IV- Investment policy, track record, portfolio, and sales load should all be researched when assessing a fund. The identity of the custodian bank for the fund, or number of shares outstanding, does not bear on its performance or suitability.

Potential investment company clients should be advised to investigate a fund by looking at which of the following? I. Investment policy II. Number of shares outstanding III. Custodian bank IV. Portfolio

Weak form

States that prices reflect all past publicly available information, but that this has no validity for predicting future price movements. It essentially states that price movements are random. This implies that technical analysis is basically useless to improve returns, but fundamental analysis still has potential value.

strong form

States that prices respond rapidly to both publicly available and private information, so that no one can profit by trading on this information.

semi strong form

States that prices respond rapidly to publicly available information, so that no potential gains can be made by trading on that information. This implies that anyone with inside information has an inherent advantage and can profit by trading on it.

Dividend growth model and dividend discount model

The 2 most common forms of DCF used in the valuation of common stock are the ____________ and _________

II and III - The basic rule for inherited securities is that they are transferred to the beneficiary at fair market value at the date of death. However, the tax code allows an exception for estates that require a federal filing (those with over $12,060,000 of assets in 2022). In this case, the estate can choose to use an "alternate valuation date" that is set 6 months after death. It would choose to do this if the securities have depreciated, resulting in a lower estate tax liability.

The executor of an estate subject to federal estate tax is permitted to use an alternate valuation date: I for securities that have appreciated after the date of death II for securities that have depreciated after the date of death III that is 6 months from the date of death IV that is 9 months from the date of death

c- It may be assumed that a broker-dealer member of FINRA is also registered with the SEC. As such, when it comes to financial requirements, bonding, recordkeeping, and so forth, the SEC's requirements always trump those of the states.

USATrade Securities, a FINRA member broker-dealer, is registered in 10 Midwest states. Regarding financial requirements, USATrade must meet those of A the state with the most stringent financial requirement B the state in which the principal office of the member is located C the SEC D FINRA

D- NASAA does not set rules for federal covered advisers - only the Investment Advisers Act of 1940 applies! NASAA rules for IAs only apply to State-registered advisers (those advisers with less than $100 million of assets under management).

Under NASAA rules, which of the following records must be retained for 5 years by a Federal Covered Adviser? ACommunications to 2 or more persons BOrder memoranda CCanceled checks DNone of the above

B- Limited partners cannot assign properties or perform management functions. Performing these actions would cause that person to be viewed as a general partner - who takes on unlimited liability. Partnership agreements will include provisions on allocating profits; compensation to the general partner; and claim to assets upon dissolution.

Under partnership democracy provisions, the partnership agreement must give detailed disclosure of all of the following EXCEPT: Athe procedures for allocating profits from investments to the limited partners Bthe procedures for allowing limited partners to assign specific properties Cthe general partner'scompensation arrangement Dthe limited partners' claim to assets upon dissolution

I and II- Advisers who have custody must segregate a client's securities and keep them in a safe place, deposit client funds in bank accounts that contain only client funds (may be combined in one account, but complete records must be kept), report to clients at least every 3 months with a statement, and annually arrange for an unannounced audit by an independent accountant that will report the audit results to the SEC. All clients must be notified in writing of the location of their securities or funds and of any changes to the location. It is not necessary to notify the client before the move to obtain the client's specific written authority to move the fund. The original custodial agreement includes that authority at the discretion of the adviser.

Under the Investment Advisers Act of 1940, an adviser who has custody of a client's funds must I. notify a client when the client's funds are moved to another location II. segregate client's funds and keep them identified by client III. not move the client's funds without prior notification and specific written authority from the client

I,II,IV- The NASAA Statement of Policy permits oral discretion to be exercised by an investment adviser for up to 10 business days; as long as a written power of attorney is obtained from the customer within 10 days of exercising such oral discretion. (Please note that if the investment adviser is also a registered broker-dealer, the rules of FINRA would not permit this - FINRA requires written power of attorney from the customer prior to exercising discretion in the customer's account). Charging a customer an advisory fee that is excessively high relative to the fees charged by other advisers for similar services; failing to disclose sources of compensation received by the adviser in connection with rendering advisory services to that client (such as taking commissions on recommended trades); and inducing a customer to trade a security based upon a rumor; are all unethical and prohibited practices.

Under the NASAA Statement of Policy, which of the following are unethical practices of investment advisers? I Telling a customer to buy or sell a security based upon a rumor heard about that security II Failing to disclose sources of compensation received from anyone other than that customer relating to rendering advisory services to that customer III Exercising discretion for a short time period upon oral instruction of a customer IV Charging a customer an advisory fee that is extremely high relative to fees charged by other advisers for similar services

A- Under the Securities Act of 1933, during the "20 day cooling off period" when an issue is in registration, advertising or recommending the issue is prohibited. However, an advertisement that is so limited in scope that is qualifies as a "tombstone" can be distributed. Essentially, the limit of information permitted in a tombstone is: Issuer Name, Underwriter Name, Type of Security Offered, Offering Size, Estimated Public Offering Price, and the Type of Business that the issuer is in. Because these are non-promotional (they are so boring that they look like a "tombstone" - hence the name), they are permitted to be published during the cooling off period (though in the real world, this typically does not happen until the effective date).

Under the Securities Act of 1933, during the 20 day cooling off period for a new issue that is in registration: Aan advertisement that meets the definition of a "tombstone" may be published Bany advertisement that is not overtly promotional may be published Cany advertisement that balances potential investment rewards with a discussion of potential risks may be published Dno advertising of any kind may be published until registration is effective

A- Unless there was something specified in the question or the answer choice to indicate that the transaction met one of several specific conditions, (isolated nonissuer, fiduciary, unsolicited, and so forth), sales to individuals, regardless of their wealth, are not exempt transactions. If the transaction is truly unsolicited (and the Administrator has the power to verify that), it is an exempt transaction. Transactions with financial institutions such as banks, savings and loans, and insurance companies are exempt. Although not specifically a financial institution, the USA also considers sales to broker-dealers to be exempt transactions.

Under the Uniform Securities Act, all of the following are included in the definition of the term exempt transaction except A.a sale of securities to an individual investor with a net worth of more than $5 million B.a sale of unregistered nonexempt securities in an unsolicited transaction C.a sale of nonexempt securities to a broker-dealer D.a sale of securities to a bank

A- An ETN is an Exchange Traded Note. It is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. They are not an equity security - they are a debt instrument. ETNs are listed on an exchange and trade, so they have minimal liquidity risk. In comparison, a regular structured product is non-negotiable and, if redeemed prior to maturity, imposes an early-redemption penalty. ETNs make no interest or dividend payments. Their value grows as they are held based on the growth of the benchmark index, with any gain at sale or redemption currently taxed at capital gains rates. Thus, they are tax-advantaged as compared to other structured debt products.

When comparing an ETN to a structured product, which statement is TRUE? AETNs can be traded at any time while structured products cannot BETNs offer current income while structured products do not CETN income is taxable at higher rates than income from structured products DETNs are equity securities that are exchange listed

B- ETFs (Exchange Traded Funds) are actively traded on stock markets like any other stock. UITs (Unit Investment Trusts) are created by a sponsor and sold with a prospectus. The secondary market for these is usually thin, though the sponsor does make a market in trust units. Both ETFs and UITs have low expense ratios; both are typically passively managed (that is, the portfolio is basically fixed); and cash dividends received from both qualify for the lower 15% tax rate if the portfolio holds equity securities.

When comparing an Exchange Traded Fund to a Unit Investment Trust, the customer should be made aware that: Aexpense ratios tend to be higher for ETFs than for UITs Bthe secondary market for UITs is limited while ETFs are actively traded CUIT portfolios are actively managed while ETF portfolios are passively managed Dcash dividends received from UITs do not qualify for the lower 15% tax rate, while cash dividends received from ETFs do qualify for the lower rate

C- Isn't this one special!! The rule on notifying clients of a change of ownership of an investment adviser only applies to investment advisers organized as partnerships. If there is a change in the majority of the partners (as would be collapsing a partnership into a sole proprietorship), then each client who has signed an advisory contract must be notified of the change. This is a requirement of NASAA Rule 502(c) for State-registered advisers and also is a requirement of the Investment Advisers Act of 1940 (for Federal covered advisers).

When must a Registered Investment Adviser (RIA) send a notice of change in ownership? ATo each client, when the RIA changes its business form from a sole proprietorship to a partnership BTo the State Administrator, when the RIA changes its business form from a sole proprietorship to a partnership CTo each client, when the RIA changes its business form from a partnership to a sole proprietorship DTo the State Administrator, when the RIA changes its business form from a partnership to a sole proprietorship

Because the C corporation is an entity separate from its shareholders, suitability for a C corporation account is based solely on the company itself. All of the others provide flow-through of income and loss to the individual owners so it is important to view the collective suitability of the individual owners (or single owner in the case of the sole proprietorship).

Which of the following business accounts does not require considering the suitability of the owners? A General partnership B Sole proprietorship C S corporation D C corporation

B- f an investment adviser is a partnership, and there is a change in the majority of the partners, this is legally considered to be an "involuntary assignment" of the advisory contract to a new partnership; and therefore, customer approval of the assignment is required. Note that this legal interpretation does not apply to investment advisers formed as corporations; it only applies to partnerships.

Which of the following events would result in an advisory contract being considered to have been transferred? AAn investment adviser formed as a partnership with 10 partners, admits 2 new partners BAn investment adviser formed as a partnership with 2 partners, admits 10 new partners CAn investment adviser formed as corporation with 10 shareholders, admits 2 new shareholders DAn investment adviser formed as a corporation with 2 shareholders, admits 10 new shareholders

C- The management "styles" are basically active asset management (the manager selects the specific investments) or "passive" asset management, where the manager uses index funds as the investment vehicle. Diversification is not a style; rather it is a technique used to reduce risk.

Which of the following is NOT a portfolio management "style?" AActive management BPassive management CDiversification DIndexing

B

Which of the following is NOT a security? AVariable annuity for retirement BTreasury bond futures contract COption on a precious metals futures contract DAmerican depositary receipt

I and IV- Corporate annual reports are 10K reports which are audited reports. The 10Q is a quarterly report which is unaudited. Corporate annual reports contain the following audited financial statements - Income Statement; Balance Sheet; Statement of Changes to Retained Earnings; and Statement of Sources and Uses of Cash.

Which of the following statements are TRUE regarding corporate reports sent to shareholders? I The 10K report consists of the annual financial statements II The 10K report consists of the quarterly financial statements III The 10Q report consists of the annual financial statements IV The 10Q report consists of the quarterly financial statements

C- For a security to be sold, it must be exchanged for value. Fixed annuities and precious metals are not securities, so no security sale took place. Donating a security does not qualify as a sale.

Which of the following would be included in the Uniform Securities Act's definition of a "sale"? A Sale of a large fixed annuity contract to a taxable institution B Conveying, for value, precious metals to a jewelry distributor C Transfers, for value, of unit trusts to a nontaxable organization DDonation of interests in rights, warrants, or options on a nonexempt security

C- A person who renders advice to insurance companies is giving advice to an institutional investor and is exempt from registration in the State, as long as the adviser does not have an office in the State. In order to be defined as an "investment adviser," that person must be compensated for giving investment advice. Someone who gives investment advice to a charity pro bono ("pro bono" means "for the public good") is not compensated and thus does not fall under the definition. A professional such as an accountant or lawyer who only gives incidental advice about investing in securities without separately charging for the advice is excluded from the definition. A person who is advertising for advisory customers is holding himself out as an investment adviser, and would fall under the definition.

Which of the following would be required to register as an investment adviser in a State? AA person with no office in the State that only renders investment advice to insurance companies for compensation BA person who gives investment advice to charitable organizations on a "pro bono" basis CA person who has no current advisory customers, but who is seeking clients by newspaper advertising DA person who gives advice about investing in securities only as an incidental part of his accounting practice

A-

Which of the following would generally NOT result in any income tax liability? A Death benefit proceeds from a life insurance policy B Qualified dividends from common stock C Profits generated by an S corporation D Profits generated by a sole proprietorship

A- Excluded from assets that count in net capital are any intangible assets, including deferred charges, goodwill, franchise rights, organizational expenses, patents, copyrights, and marketing rights. Also excluded are advances or loans to officers or owners of the adviser, since it is unlikely that these would be repaid if the adviser were liquidated. Believe it or not, an automobile used in the business or office buildings or furnishings used in the business ARE included in the computation if the adviser is NOT an individual. The question does not state whether the adviser is an individual, so we cannot assume this.

Which one of the following items would be included in the computation of an investment adviser's net capital? ASofa in the investment adviser's office BBusiness reputation (goodwill) of the investment adviser CCopyright held by the investment adviser for a finance book DFranchise right held by the investment adviser

D-

Which statement is TRUE about hedge fund fees? AHedge fund managers can only charge fees based on a percentage of assets under management BHedge fund managers can only charge a fixed annual fee CHedge fund managers can charge performance fees that are limited in amount by the Investment Advisers Act of 1940 DHedge fund managers can charge performance fees that are not limited in amount

II and III- In order for Registration by Coordination to be effective in a State, the registration statement used for the SEC filing must have been filed with the State 10 business days prior to the proposed sale date. In contrast, the Securities Act of 1933 requires that the registration statement be filed with the SEC at least 20 days prior to the proposed sale date.

Which statements are TRUE about an issue that is registered in a State by Coordination? I The statutory cooling off period under the Securities Act of 1933 is 10 days II The statutory cooling off period under the Securities Act of 1933 is 20 days III The statutory cooling off period under the Uniform Securities Act is 10 days IV The statutory cooling off period under the Uniform Securities Act is 20 days

I and III The initial offering of closed-end management company shares is made under a prospectus; then the books of the fund are closed to new investment and the shares are listed on an exchange and trade like any other stock. The shares are not redeemable; they are negotiable. The portfolio of investments is managed - remember, this is one of the 2 types of "management" companies.

Which statements are TRUE regarding closed-end management companies? I The initial offering of shares is made under a prospectus II Shares are redeemable with the issuer at the NAV III Shares trade in the secondary market at prevailing market prices IV The portfolio of investments is not managed

D- The Investment Adviser Registration Depository (IARD) is an electronic filing system that facilitates investment adviser registration, regulatory review, and the public disclosure information of investment adviser firms. The IARD is used for filing Form ADV Parts 1 and 2. If the "brochure" is not delivered at least 48 hours before (not after) the signing of the agreement, the client has a 5-day penalty-free withdrawal right. Annually, the Part 2 (brochure), or a summary of material changes, must be delivered within 120 days of the end of the adviser's fiscal year (unless there have been no material changes). The brochure does not have to be delivered to all clients; those purchasing impersonal advice for less than $500 per year are exempted. There is also an exemption for delivery to investment company clients, but that would not apply here because if the adviser had any of those, it would have to be federal covered rather than state- registered.

With regard to a state-registered investment adviser using Form ADV Part 2 as its brochure, it would be correct to state that A.if requested by a client, it must be sent within 5 days of the request Bit must be delivered to all new clients Cit must be delivered not later than 48 hours after entering into an advisory agreement with a new client Dit is filed through the IARD system

Cannot; can- s a general rule, the Administrator cannot issue an order stopping the sale of a security, or denying or revoking a registration, retroactively. However, if the Administrator were to issue a stop order because of something trivial, like not paying the required fee, then once the fee is paid, the stop order would be vacated, and this is done retroactively to the date of the original stop order.

______ issue stop orders retroactively _______vacate them retroactively

13f

a report filed with the SEC by investment managers who exercise discretion over the accounts of customers who collectively hold $100,000,000 or more of equity securities. The _____must be filed within 45 days of the quarter ending where the $100,000,000 dollar limit was reached.

13g

an annual report filed with the SEC by anyone who acquires a 5% or greater holding in a publicly traded company and intends to remain a passive investor. The report is due within 45 days of year end.

Self Attribution

investing because you think you know an investment area really well ("I am a car nut, so I know which auto stocks to buy!");

Market risk

is the uncertainty that the market price of a stock will drop even when earnings are strong

Confirmation bias

making an investment decision based on information received that confirms an investor's already-held belief.

13d

report filed with the SEC by anyone who accumulates a 5% or greater holding in a publicly traded company, this is a public announcement that this person may intend to exercise "control" over the corporation, or may attempt to take over the company.

behavioral finance theory

studies how human nature and psychological biases can influence investment behavior and cause markets to be "inefficient." Some of these are:

Suret bond

t is an insurance policy against theft or embezzlement by a person or individual

Regulation T

that controls the extension of credit on non-exempt securities from brokers to their customers.

Regulation U

the Federal Reserve regulation that controls credit extended by banks to their customers,